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Saris Co has set a budgeted labour cost based on the assumption of a learning rate of 80%. Its Production Director has now found that the actual learning rate is 70%.
Which of the following statements is true?
The cost gap will increase and the target cost will increase.
The cost gap will decrease and the target cost will decrease.
The cost gap will remain the same and the target cost will decrease.
The cost gap will decrease and the target cost will remain the same.Number 4 is set to be the correct answer.
Explanation:
The lower learning rate will mean costs are lower and the cost gap will decrease. The target cost will not be affected by the change in the learning rate as it is determined by selling price and desired margin.
But I am not sure I understand. A lower learning rate would mean higher costs to me (more training etc) , therefore an increased cost gap.
Could you please explain further?
Thank you!
The answer is correct.
As I do explain in my free lectures, the lower the learning rate then the faster they are learning (if the learning rate is 100% then they will not be getting any faster at all).
Since they will be learning faster the actual time taken will be lower than budget, so lower costs and therefore a lower cost gap.
There is no mention of any training costs in the question – learning does not rely on training it occurs because of experience from keep repeating the same work.
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